How Much Can Mortgage Rates Change In One Year?

At just under four percent, current mortgage rates are among the lowest in history. Consumers should be wary, though: those rates could rise at any time, and the size of the increase could be shocking. Some historical examples will illustrate just how extreme mortgage rate behavior can be.

Of course, interest rates could also fall, but at current levels, they have much farther to rise than to fall. Knowing what to watch for will help consumers understand just how fragile today's mortgage rate opportunity may be.

Historical Changes in Mortgage Rates

Based on historical monthly averages from the Federal Reserve, here are some facts about mortgage interest rates that put today's rates in perspective.

Highest ever. 30-year fixed rates peaked at 18.45 in October of 1981.

Lowest ever. The low point for rates was reached fairly recently, at 3.35 in both November and December of 2012. Comparing today's mortgage rates with the high and low points illustrates how much closer they are to the bottom than to the top.

Long-term average. Based on history going back to the early 1970s, the average rate for a 30-year fixed mortgage has been 8.44 percent - more than twice today's level.

Biggest rise in one year. The biggest increase in rates in a year was a jump of 5.83 percent for the 12-month period ending in April of 1980. Such an increase now would put rates over 9.5 percent by this time next year.

Biggest drop in one year. On the other side of the coin, the biggest year-over-year drop in rates occurred during the period ending in February of 1983, at which time 30-year rates had fallen by 4.56 percent. Of course, such a drop is not possible today, since rates are already below that level.

Average year-over-year change. So what's normal -- how much do rates typically fluctuate from year to year? Historically, the average change in one year, without regard to direction, is 0.89 percent.

History makes it clear that a lot can happen with interest rates over the course of a year. What will actually happen depends on some key economic conditions.

What to Watch

Here are the key things to watch for a clue to how rates will change over the next year:

Inflation. Unusually low inflation has helped facilitate low mortgage rates. Over the past year, a big factor in driving down inflation has been the steep plunge in oil prices. Assuming that plunge does not repeat itself over the next year, it will be difficult for inflation to stay as low as it has been. Expect mortgage lenders to be very sensitive to any evidence that inflation is gathering momentum.

Default rates. Mortgage lenders need their rates to cover not just inflation, but also the possibility that some borrowers will not pay off their loans in full. The S&P/Experian First Mortgage Default Index shows that over the past five years, default rates have dropped from 4.53 percent to 1.02 percent. Fewer defaults allow lenders to charge lower interest rates, but if defaults start to pick up again, expect rates to rise.

Economic activity. The story of the recovery since the Great Recession has been on-again, off-again. If the economy is able to sustain growth more consistently, higher lending demand should drive interest rates higher. The Federal Reserve would also be prompted to speed up the sales of the bond inventory it bought to drive mortgage rates down during its quantitative easing programs. So, the hotter the economy gets, the greater the chance that rates will rise.

Current mortgage rates may not seem like anything special, simply because rates have been unusually low for a few years now. However, history shows just how rare -- and potentially fleeting -- today's rate opportunity might be. The future may well teach the same lesson as the past.